Pizza at Home is a frozen pizza company that supplies several large grocery store chains. The managers of Pizza at Home are currently negotiating a four year contract with Saucy Pizza, a manufacturer of pizza sauce. Saucy Pizza will supply a specified quantity of canned tomato sauce to Pizza at Home over a four year period; however; Pizza at Home can ends its contract with Saucy Pizza at the end of the first, second, or third years if Saucy Pizza does not supply quality tomato sauce. What can the manager of Pizza at Home do to avoid the end- game problem?

Question

Quizplus · Accepted Answer

Offering to renew the contract with Saucy Pizza if they provide quality tomato sauce in all four years incentivizes Saucy Pizza to maintain high standards throughout the duration of the contract to secure future business, thus avoiding the end-game problem where quality might drop in the final year if no further business is expected.

Pizza at Home Is a Frozen Pizza Company That Supplies